Do You Drink the REIN Kool-Aid?

byBrian PersaudonJune 29, 2009

Man I had blast this weekend at get A.L.I.F.E. workshop. The Western Canadian REIN members are so amazing, getting to know a lot of you was absolutely inspiring.

The idea for this blog came to me talking to some rookie Ontario REIN members while at get A.L.I.F.E. this weekend. I was in line to get something to eat during our lunch breaks, and I was amazed to hear that REIN members could still potentially pass the buck doing due diligence just buy saying Don recommends it at top 10 town. This is the quickest way to failure…especially when doing JV’s..YOU HAVE TO DO YOUR OWN DUE DILIGENCE DOWN TO THE PROPERTY LEVEL.

Just by knowing that your area is a top 10 town doesn’t mean your real estate will will appreciate 10% a year…believing in this gives the WRONG impression on what REIN is and you will set yourself up to fail. What the top 10 town report is a guide showing you where to start.

Rhyming off stats on net in-migration, plant openings etc not only make you feel good in front of non-rein members, it also gives you what’s called the “illusion of validity” by behavioural economist Daniel Kahneman.

It’s a problem that afflicts us all, says Kahneman, who won the 2002 Nobel Prize in economics for his work on irrational choices. From stockbrokers to baseball scouts, people have a huge amount of confidence in their own judgment, even in the face of evidence that their judgment is wrong. I’ll prove this by comparing AVERAGE downtown Toronto pre-construction condos vs the AVERAGE semi-detached homes in top 10 towns in the GTA.

This is a pretty provocative topic so I want to be clear: I’m not recommending that you use this data to buy pre-construction condos and I’m not saying that top 10 towns are bad places to invest into..what I am saying is you must do your own due dilligence above what you read, whether it’s REIN materials or conference board of canada.

Here goes

The top 10 towns in the GTA in 2005 according to REIN were:

Brampton and Orangeville (3rd Overall)

Markham and Whitchurch-Stouffville (5th Overall)

Durham Region – Pickering, Ajax, Whitby (6th overall)

404 corridor – Aurora, Newmarket (7th overall)

Oshawa (8th overall)

And here is a chart comparing the performance of semi-detached homes vs the average pre-construction condo.

As we can see pre-construction condo’s blew apart everything in the GTA since 2006 and if done right were a great investment, on the flip side, buying an average semi-detached property in top 10 towns around the GTA could have been a bad investment. What’s even more suprising, there seem to be stronger fundamentals behind the pre-construcion craze in downtown Toronto than we would like to think.

My price data was compiled using stats from the Toronto real estate board and from Realnet. I don’t buy pre-construction condos in downtown Toronto. The numbers don’t lie and we as REIN members must always do expert due diligence ourselves before we invest in any property.

Brian Persaud from Real Experts Inc has been a REIN member since 2005 and currently buying property in specific neighborhoods in Edmonton.

Good comments Brian. I have two issues about the idea that TO pre-builds blew everything else away. First, that’s only based on a short-term (<5 year) hold, with no attention to cash flow. Second, it's one of those possible 'strategies' which carries much more risk than the other options. If you tried the same idea in Vancouver you'd have been totally screwed.

Until I can confirm the average price for pre-construction prior to 2005 you could be right.

Here’s why: if i add in the 2005 numbers to the the top 10 in the GTA they look a lot better. I can’t tell you if the condo appreciated in values from 2005-2006 (i don’t have the numbers)…i do suspect they have gone up a lot that year.

As for blowing apart…here’s my reasoning:

Would the condo’s cashflow with 20% if you bought in 2005? They may. I have seen people buy studios for $175k and they rent them furnished for $1800/mth…on the flipside, if you bought some of the semi’s around the gta you would have more vacancies, be renting to an arguably harder to deal with tenant profile, and would have spent more on repairs and maintenance than you would on a condo. So cashflow could be about even for both types of properties leaving equity appreciation

But again, I want to be clear…these are averages.

I tried to get as specific as the data would allow – picking the particular type of housing in the different districts…but it’s still a gigantic sample size. The particular area in downtown Toronto has more condos being built than entire cities.

I just wanted to highlight to REIN members that your success depends on what you do with the resources you have and that we must ALWAYS ALWAYS ALWAYS do expert due diligence before they buy anything.

Agreed, and there are some pre-builds which make sense if you’re going to buy them and hold for a longer term. I’ve gotten a couple emails from developers looking to sluff of a couple units, and those make sense. I agree with you about being responsible for your own DD.

We do have pre-construction condo sales across the Durham region. Compare Apples to Apples. I would be interested to see what you come up with. 🙂

I focus on Ajax, Pickering and Whitby. I buy for cash flow in solid areas, and the price point and cash flow works much much better than pre-sale condos. At least what my research has shown. I am open to seeing some hard numbers. Furnished suites are a niche market and have their own headaches – which includes a lot of overhead.

There are many other factors to consider as I’m sure you know. Here’s a simple one – supply and demand. Check out the number of rental condos available for downtown Toronto and then compare them to the number of Semi-Detached in Pickering.

I don’t own condos in Toronto. I understand the apples to apples…and I know you and Gord Nevin are kicking butt in Durham…i wanted to make a point that you should do your own due diligence. This is why I compared top 10 towns to Toronto condos…

If we get more questions on this I can dig deeper. It’s a really niche topic and I would like to provide value to as much as Chris’s readers as possible

I’ll toss out an alternate opinion on the REIN top ten list: I agree that it’s necessary to do your own research on your selected neighborhoods, properties and tenants. But doing all the background work on a town that’s already in the REIN top ten is a waste of time. Paying for and heeding the REIN research isn’t “passing the buck” on due diligence, it’s just outsourcing it. I pay REIN dues and read their research precisely so I don’t have to do it myself. It’s no different than hiring a lawyer for my legal work, a realtor for my selling or an accountant for my taxes. REIN is the professional researcher on my team.

@JimW, I completely appreciate where you’re coming from, and it does make a lot of sense to look at it that way. I think there’s a reasonable amount of grey between the two sides of the due diligence coin. It’s the same way you should manage your property manager, question your accountant, and challenge your lawyer. You’re very right to use the expertise of others, but I also think that putting blind faith in someone else’s work is a recipe for disaster.

I think Chris raises a good point…in the end you and you alone are responsible for your financial success. Don always tells people do their own property goldmine scorecard. While some people have fantastic results just following the top 10 towns..I think presented a some evidence that people still must do their due diligence to maximize their returns. Think if you picked the wrong street in Pickering, you would have missed out on huge appreciation numbers over the past 4 years.

It’s absolutely impossible for Don to monitor every street in every neighborhood…perhaps an idea for a future blog would be neighborhood comparisons within a city.

Are people really paying for research when that information is available for free?

To recommend towns like Brampton, Oshawa, and Markham is silly, and almost meaningless. They are geographically huge areas. Brampton alone runs form 401 up to countryside rd and from 427 out to Georgetown. The fundamentals in Castlemore are vastly different than Springdale. And there are a dozen more “towns” in Brampton. Of course, proper due-diligence will reveal that.

There’s a lot of value in doing city level analysis, both because it’s where the best information is available, and because we all have to start somewhere. It makes no sense to be geographically tied to the area you live in if the fundamentals are better elsewhere. That said, I totally agree with you about the difference between neighborhoods; analysis to the neighborhood and property level is a major part of REIN’s ACRE system.

Are people really paying for research when that information is available for free?

The information is free, but the analysis is the important part. There’s always value in other people’s analysis. In this case, it’s a hell of a lot of work to analyze dozens of different cites and towns, let alone drilling into neighborhoods. There’s also the question of how much more value the experts can bring. Compared to pretty much every other real estate investment club out there, REIN’s membership fees are far more reasonable and the quality of the materials is far higher. I’ve paid for their analysis in the past and I’ll buy it in the future.

I remember getting upset at people because they didn’t share my view point…Big Rookie mistake. Now I get curious and I verify why they feel the way they feel. Questioning and seeking to understand has made me a better investor.

I think that opening yourself up to other people’s opinions shows confidence and security in yourself and indicates that you are growing and that’s actually a much harder thing to do that you would think.

I find your idea here quite interesting because I think that people should question why here, why not here.

I think the information that REIN provides is fabulous, but my belief is that you need to look at the core of the concept, not the specifics, ie, learn to fish, don’t just let Don and the others give you a fish. It’s great that they provide all the economic fundamentals in a pretty package that you can present to a jv partner, it saves a lot of time, but you do need to understand how to do the analysis on your own.